Is BYD Bombed Out?

Wednesday, August 15, 2012 7:57

With the recent news that several of BYD’s largest shareholders have been dumping their shares in the market, speculation about BYD’s future were reignited once again.

Data from the Shenzhen Stock Exchange show that 53.77 million shares, or 2.3% of BYD’s total outstanding stock, had been sold through the exchange’s block trading system at prices ranging from 12.78 yuan to 18.30 yuan each from July 2 to Aug. 1. A total of 477 million BYD shares, or one-fifth of the company’s share capital, became tradable on the expiration of a 12-month lockup period following the company’s Shenzhen stock market debut.

[…] Six senior executives at BYD sold a combined 13 million domestic A-shares for a total of about 184.30 million yuan in July. They were Vice President Liu Huanming, Vice President Mao Dehe, Vice President Wang Nianqiang, Vice President Yang Longzhong, Vice President Zhang Jintao, and company supervisor Zhang Huibin, the Shenzhen exchange data show.

Which, if you are looking at the numbers, is not a huge number. After all, Facebook could potentially see 10% of its insider stock be sold next Thursday, and this is a firm that is backed by the government, and is seeing a steady stream of good news trickle in with respect to further government support

However, as highlighted in the Reuters piece BYD caught in two Chinese economic traps, BYD has some mateiral headwinds that it needs to contend with.

The withdrawal of the 2009 government stimulus has sharply slowed down passenger vehicle sales growth – from 33 percent in 2010 to 5.2 percent in 2011. Domestic producers, who mostly serve the poorest and most price-sensitive customers, have been hit especially hard. Their market share fell to 39 percent in June from 34 percent six months earlier, official data shows.

BYD did not anticipate the change in trend. It expanded aggressively in the past two years, and the ratio of debt to assets ratio rose from 53 to 64 percent between 2009 and 2011, while operating cash flow is deteriorating.

Many potential customers fear that the low-cost domestic cars aren’t as safe as foreign brands. The percentage of Chinese automobile buyers wanting to purchase a European vehicle has increased from 25 percent in 2009 to 35 percent this year, according to JD Power. Those fears help explain the attention given to June crash, which killed all the occupants of a BYD electric taxi while no one in the other two cars involved was badly hurt. A government-led probe cleared the electric battery in the accident.

Honestly, reminds me of similar analysis on Suntech (and the solar industry) who have also been hammered recently following falling margins and a slew of bad news from Europe.

However, when it comes to BYD, where I personally believe things went wrong was in the fact that they tried to build cars versus stick to their core product of batteries and battery systems. Products that are without a doubt going to play an important role in the future of the automotive industry, and had they focused on batteries (and systems) BYD would have likely owned that market. instead of struggling to sell cars, and leverage up into a capital intensive business that they had no reason to be in … unless of course you could ego.

Which leads me to my final conclusion. for many years, there were certain firms that were held up as China’s most innovative, and they were fully subsidized to build out their infrastructure, but as these firms struggle to make the busienss model convert there is a growing risk that their subsidized model will be left to rust on the side of the road. Just like Suntech.

At this time, I do not see bankruptcy for either, however investors in these firms (I am one) are going to be in for a long road to recovery. Because unlike the glory days of 2008 when everyone was ready to by a hyrbid and load up on solar panels to save the world, reality has set in. A reality that the economics of these products is simply not there for the consumer at this point (for various reasons) and that the next few eyars will be a period were hard decisions are made, and business models are recalibrated.

Investors will just have to hang on.

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One Response to “Is BYD Bombed Out?”

  1. Car News says:

    March 7th, 2013 at 8:00 am

    I guess BYD is not building their dream of making a successful Chinese Car company! 🙂